What Is a Car Loan and What is the Interest on a car loan ? - Complete Guide
Buying a car is a big milestone, and for most people in India, it starts with taking a car loan. But before applying, it’s important to understand what a car loan is, how interest rates work, what credit score you need, and what happens after the loan is repaid or if it’s not paid on time. This guide explains the entire process in simple terms so you can choose the right loan confidently and avoid mistakes that affect your finances or credit score.
What is a Car Loan?
A car loan is a type of secured loan that helps you buy a new or used car by borrowing money from a bank, NBFC, or financial institution. Instead of paying the full price upfront, you pay a down payment, and the lender finances the rest. You then repay this borrowed amount through monthly EMIs over a fixed tenure.
Since a car loan is secured, the vehicle remains hypothecated (linked) to the lender until the loan is fully paid off. This means the bank has temporary ownership rights and can take action if EMIs are not paid.
Car loans are commonly used because they offer:
Affordable interest rates
Flexible repayment tenures
Easy documentation and approval
Financing options for both new and used cars
In short, a car loan allows you to buy your dream vehicle now and pay for it comfortably over time.
How Does a Car Loan Work?
A personal loan works in a simple and structured way. Once you apply and your loan is approved, the lender transfers the amount directly to your bank account. You then repay this borrowed amount through fixed monthly EMIs over a selected tenure.
Here’s a clear, step-by-step breakdown of how a personal loan works:
1. Choose Your Car and Loan Amount
You decide the car you want to buy and how much loan you need. Most lenders finance 80%–90% of the car’s on-road price. The remaining amount is your down payment.
2. Apply for the Car Loan
You can apply online or at the dealership. Basic details like income, job type, address, and credit score are checked to determine eligibility.
3. Loan Verification & Approval
The bank verifies your documents, checks your credit score, and calculates your repayment capacity.
If everything looks good, the loan is approved quickly — sometimes the same day.
4. Loan Disbursal to the Dealer
Once approved, the loan amount is disbursed directly to the car dealer, not to you. You then complete the car registration process.
5. Hypothecation on Your RC Book
Until the loan is fully repaid, the car remains hypothecated to the bank, which means the bank technically has ownership rights as security.
6. EMI Repayment
You repay the loan through monthly EMIs for a tenure ranging from 1 to 7 years. Your EMI includes both:
Principal
Interest
7. Loan Closure
When all EMIs are paid, you receive an NOC from the bank and can remove the bank’s hypothecation from your RC. The car becomes fully yours.
What Is the Interest on a Car Loan?
The interest on a car loan is the extra amount you pay the lender for borrowing money to purchase your vehicle. It is calculated as a percentage of the loan amount and added to your monthly EMIs. Car loan interest rates in India can vary widely based on the lender, your credit score, the car type (new or used), and your repayment capacity.
Understanding how car loan interest works helps you choose the right loan, reduce total cost, and negotiate better rates.
Typical Car Loan Interest Rates in India
New Car Loan: 7% – 12% per annum
Used Car Loan: 10% – 16% per annum
Electric Car Loan (EV): 6.75% – 10% per annum (often lower due to EV incentives)
Premium/Luxury Cars: 8.5% – 14% per annum
Note: The best rates (7%–8%) are generally offered to borrowers with excellent credit scores (750+), stable income, and a good banking relationship.
Factors That Decide Your Car Loan Interest Rate
1. Your Credit Score
New cars get the lowest rates (7%–12%).
EVs sometimes get even lower rates due to government incentives.
Used cars attract higher interest because of faster depreciation.
2. Type of Car (New, Used, or EV)
Your credit score majorly influences the rate:
750+ score: 7%–8% (best rates)
700–749: 8%–10%
650–699: 10%–14%
Below 650: Higher rates or rejection
Lenders reward good repayment history with lower interest.
3. Loan Tenure
Shorter tenure = lower total interest
Longer tenure = higher total interest
Your EMI should fit your monthly budget.
4. Down Payment
Shorter tenure = lower total interest
Longer tenure = higher total interest
Your EMI should fit your monthly budget.
5. Income and Employment Stability
Stable, verified income leads to better loan terms, including lower interest.
6. Relationship With the Bank
Banks often offer special low rates (starting at 7%) to existing customers with a salary account.
At Money Matter, we don’t just compare car loan interest rates — we compare the entire lending package. That includes:
Interest rate differences
Hidden charges
Insurance add-ons included or excluded
EMI impact
Long-term cost of ownership
Clauses that can affect claims or repairs later
So instead of choosing a loan just because the interest rate looks low, Money Matter helps you understand which loan is actually the best overall, and which lenders offer protection features like engine cover or breakdown assistance that can save you from huge repair bills in the future.
This saves you from surprises later and ensures you get a loan that genuinely benefits you.
How Car Loan Interest Is Calculated
Most banks use the reducing balance method, meaning interest is calculated only on the remaining loan amount each month.
Your EMI includes:
Remaining principal
Interest for that month
Fixed vs Floating Interest Rates
Fixed Rate
Interest remains constant
EMI remains the same
More common in India
Floating Rate
Can change with market conditions
EMI may vary
Less common for car loans
Tips to Get the Lowest Car Loan Interest (7%–8%)
✔ Maintain a credit score of 750+
✔ Make a higher down payment (20–30%)
✔ Choose a shorter tenure (3–5 years)
✔ Apply with your existing bank
✔ Compare offers instead of relying only on dealership financing
Summary
The interest on a car loan in India generally starts from 7% per annum for new cars and can go higher depending on your credit score, car model, and loan tenure. Understanding how interest rates work helps you choose a loan that saves money in the long run.
How to Get a Bank Loan for a Car
Getting a bank loan for a car is fairly simple today, but choosing the right loan is not. Every lender has different interest rates, eligibility rules, hidden charges, and mandatory add-ons. Some loans come bundled with limited insurance coverage, while others offer full protection like engine safeguard, breakdown assistance, zero depreciation, flood cover, and more. Understanding all this on your own can feel overwhelming.
Here’s the simple step-by-step process to get a bank loan for a car — along with how Money Matter makes this process easier:
Step 1. Check Your Eligibility
Banks check basic criteria such as:
Minimum age (usually 21+)
Income level
Employment stability
Credit score (best rates for 750+)
Residential stability
Checking your eligibility beforehand increases your chances of quick approval.
Step 2. Compare Interest Rates From Different Banks
Interest rates for new car loans typically start at 7% and go up depending on the applicant’s profile. Compare:
Interest rates
Processing fees
Tenure options
Prepayment rules
Down payment requirements
Avoid relying only on dealership financing—banks may offer better rates.
Step 3. Decide Your Down Payment
Most banks finance 80%–90% of the car’s on-road price. You need to arrange the remaining amount as a down payment.
A higher down payment helps you:
Get lower interest rates
Reduce EMI burden
Improve approval chances
Step 4. Apply Online or Visit the Bank
You can apply for a car loan in two ways:
Online: Through the bank’s website or mobile app
Offline: By visiting a nearby branch
Fill in the application form with basic details: income, employment, PAN, Aadhaar, and car details.
Step 5. Submit Required Documents
Banks generally ask for:
Identity proof (PAN, Aadhaar)
Address proof
Income proof (salary slips or ITR)
Bank statements (3–6 months)
Passport-size photo
Car quotation from dealer
Digital lenders may require fewer documents due to e-KYC.
Step 6. Verification and Credit Check
The bank verifies your:
Credit score
Employment
Income
Past repayment history
Better credit = faster approval + lower interest.
Step 7. Loan Approval and Agreement
Once approved, the bank gives you a sanction letter with:
Loan amount
Interest rate
EMI amount
Tenure
Charges
Review the document carefully before signing.
Step 8. Loan Disbursal to Car Dealer
After signing, the bank transfers the loan amount directly to the car dealer. You can then proceed for car registration (RC), insurance, and delivery.
Step 9. Hypothecation on RC Book
Until the loan is fully repaid, your RC (Registration Certificate) will show that the bank owns the car under hypothecation.
You can remove this once the loan is closed.
How Money Matter Helps You Choose the Best Car Loan
This entire process sounds simple, but the real challenge is knowing which loan is genuinely good and which one has loopholes.
Money Matter steps in here as your personal advisory partner:
✔ We check every clause in the loan agreement
Most borrowers look only at EMI and interest rate, but we look at:
Foreclosure restrictions
Processing fee traps
Insurance bundling tricks
Hidden costs in the loan structure
Limitations in coverage
✔ We evaluate all types of car insurance cover included in the loan
We verify whether the bank’s insurance offers:
Engine protection
Zero depreciation
Breakdown cover
Flood damage cover
Tyre & rim protection
Return-to-invoice
Roadside assistance
If anything important is missing, we highlight it immediately.
✔ We identify loopholes that could cost you money later
Many lenders include clauses that benefit them, not you.
Money Matter reads through everything and shows you:
What’s missing
What’s optional
What’s unnecessary
What’s beneficial
What the dealer doesn’t tell you
✔ We recommend the best loan based on complete analysis
Not just interest rate — but overall value, safety, claim protection, and long-term financial benefit.
Simple Summary:
Taking a car loan is easy.
Choosing the right car loan is not.
Money Matter checks everything — interest rates, charges, insurance coverage, hidden clauses — and then tells you exactly which loan gives you the best protection and the best deal.
Tips to Increase Your Car Loan Approval Chances
Keep your credit score above 700
Maintain a stable job or business
Avoid multiple loan applications simultaneously
Make a higher down payment
Apply with a bank you already have a relationship with (salary account, savings account, etc.)
What Is a Good Credit Score for a Car Loan?
A good credit score for a car loan in India is generally 750 or above. With a score in this range, you are more likely to get quick approval, lower interest rates (starting from 7%), and better loan terms.
While 750+ is ideal, here’s how banks typically view different score ranges:
Credit Score Range and Chances of Car Loan Approval
750 – 900: Excellent
Highest approval chances
Lowest interest rates (7%–9%)
Faster processing and pre-approved offers
Better negotiation power for down payment and fees
700 – 749: Good
High approval chances
Standard interest rates (9%–11%)
May need a slightly higher down payment in some cases
650 – 699: Average
Approval possible but at higher interest (11%–14%)
Bank may require stronger income proof
Some lenders may reject depending on policy
600 – 649: Low
Hard to get approval from major banks
NBFCs may approve at very high interest
Higher down payment often required
Below 600: Poor
Most banks will reject the application
Approval only from select NBFCs with strict terms
Interest rates can be extremely high
650 – 699: Average
Approval possible but at higher interest (11%–14%)
Bank may require stronger income proof
Some lenders may reject depending on policy
Also Read : Can I transfer my car loan to another bank
Why Credit Score Matters for a Car Loan?
Your credit score shows how well you’ve managed loans and EMIs in the past.
Banks use it to assess:
Your repayment behaviour
Your reliability
The risk of lending to you
A higher score = lower risk for the lender = better benefits for you.
How to Improve Your Credit Score Before Applying
If your score is low, here’s what you can do before applying:
Pay all EMIs and credit card bills on time
Reduce your credit card utilization (below 30%)
Avoid applying for multiple loans at once
Close old overdue accounts
Check your credit report for errors and fix them
Raising your score even by 30–50 points can help you secure a better interest rate.
What Happens After a Car Loan Is Paid Off?
Once your final EMI is paid, a few important steps follow to make sure your loan is officially closed and your car becomes completely yours. Here’s a clear, step-by-step format:
1️⃣ Bank Issues a No Objection Certificate (NOC)
The lender gives you an NOC and loan closure letter.
This confirms there are no pending dues.
Keep both documents safely for future reference.
2️⃣ Remove Hypothecation From Your RC (Most Important Step)
Your RC currently shows the car as hypothecated to the bank.
Once the loan is paid off, you must:
Submit NOC + RC + insurance copy at the RTO
Request Hypothecation Removal (HPT)
Get a new RC card showing your name only
This officially transfers full ownership of the car back to you.
3️⃣ Update Your Car Insurance Policy
Inform your insurer that the loan is closed.
They will:
Remove the bank’s name from your policy
Update ownership records
Ensure future claims go directly to you
4️⃣ Check Your CIBIL Report for “Closed” Status
Within 30–45 days, your lender updates the credit bureaus.
Your car loan should show as:
✔ Closed
✘ Not “Settled” or “Written Off”
A correctly closed loan can give your credit score a healthy boost.
5️⃣ Ensure Auto-Debit (ECS/NACH) Is Stopped
Double-check that:
EMI auto-debit has been cancelled
No payment is deducted the following month
Mistakes happen — verifying saves hassle.
6️⃣ Full Ownership Is Now With You
After all steps are completed, you get:
Complete legal ownership
Freedom to sell the car anytime
Clear insurance records
A stronger credit profile
Quick Summary Checklist
✔ Collect NOC
✔ Remove hypothecation (RTO)
✔ Update insurance
✔ Check CIBIL report
✔ Confirm EMI stop
✔ Enjoy full ownership
What Happens If a Car Loan Is Not Paid in India?
Missing car loan EMIs can lead to serious financial and legal consequences in India. Because a car loan is a secured loan, the lender has the right to take action, including repossessing the vehicle, if the loan is not paid on time.
Here’s what happens step-by-step if car loan EMIs are not paid:
1️⃣ Late Payment Charges Start Adding Up
Banks immediately apply:
Late payment fees (₹500–₹1,500 per EMI)
Penalty interest (2%–4% per month on overdue amount)
These charges increase your total outstanding and make repayment harder.
2️⃣ Your Credit Score Drops Quickly
Even one missed EMI is reported to credit bureaus.
This leads to:
Drop of 30–50 points for a single missed EMI
Drop of 100+ points for multiple defaults
Difficulty in getting future loans or credit cards
A damaged CIBIL score can take months or years to fix.
3️⃣ Recovery Calls and Notices Begin
Banks will:
Call you for payment reminders
Send written notices
Offer settlement or restructuring options (if genuine hardship exists)
Ignoring these makes the situation worse.
4️⃣ Bank Can Legally Repossess the Car
If you fail to pay EMIs for 90 days or more, your loan becomes an NPA (Non-Performing Asset).
At this point, the lender can:
Send final legal notice
Send agents to repossess the car (as per RBI guidelines)
Take possession peacefully and with proper documentation
Repossession is legal in India if done according to RBI norms.
5️⃣ The Vehicle May Be Auctioned
After repossession, the lender can auction the vehicle to recover dues.
If the auction amount is:
Higher than your outstanding loan → surplus is returned to you
Lower than your outstanding loan → you still owe the remaining balance
Repossession does NOT erase your loan.
6️⃣ Legal Action May Be Taken
If you refuse to cooperate, banks may take legal action to recover the remaining loan amount.
This can result in:
Court summons
Additional penalties
Long-term credit blacklisting
7️⃣ “Written Off” or “Settled” Status Damages Your CIBIL Report
If you cannot pay and negotiate a settlement, your credit report may show:
Settled
Written Off
These are severe negative marks that stay for 7 years, making future loans extremely difficult.
Important:
Car loan default affects:
✔ Your credit score
✔ Your finances
✔ Legal standing
✔ Ownership of the car
It’s always better to contact the lender early and request restructuring or part-payment options if you are facing financial difficulties.
Pros and Cons of Taking a Car Loan
| Pros of a Car Loan | Cons of a Car Loan |
|---|---|
| Buy a car without paying full amount upfront | You pay interest, which increases the overall cost of the car |
| Flexible EMIs and loan tenures (1–7 years) | Longer tenure = higher total interest paid |
| Competitive interest rates starting from 7% | Processing fees, documentation charges, and penalties may apply |
| Improves your credit score when EMIs are paid on time | Missing EMIs damages CIBIL score and leads to penalties |
| Banks cover up to 80–90% of on-road price | High down payment may be required for some profiles |
| Pre-approved offers for existing customers | Increase in monthly EMI burden, affecting cash flow |
| Option to choose between banks, NBFCs, and digital lenders | Car remains hypothecated to the bank until loan is paid off |
| Can get loans for new, used, or electric cars | Used car loans have higher interest rates |
How to Choose the Right Car Loan in India
Choosing the right car loan starts with comparing interest rates (which usually begin around 7%), checking processing fees, and selecting a tenure that keeps your EMIs affordable. You should also look at down payment requirements, your credit score, prepayment rules, and whether the lender offers benefits like zero processing fees or faster approvals. Since car loans vary widely between banks, NBFCs, and digital lenders, comparing multiple options is the smartest way to save money and avoid hidden charges.
At Money Matter, we simplify this process by helping you compare car loan interest rates, eligibility criteria, and lender terms—all in one place—so you can choose the best loan confidently and avoid costly mistakes.
FAQs About Car Loans in India
1. What is a car loan and how does it work?
A car loan is a secured loan where the bank finances most of your car’s cost. You repay the amount through EMIs, and the car stays hypothecated to the bank until the loan is fully paid off.
2. What is the interest on a car loan?
In India, new car loan interest rates generally start from 7% and vary based on your credit score, loan tenure, income, and lender policies.
3. How much down payment is required for a car loan?
Down payments typically range from 10% to 25% of the car’s on-road price. A higher down payment can help you secure a lower EMI and better loan terms.
4. Can I get a car loan with a low credit score?
Yes, but it may come with higher interest rates, stricter conditions, or a higher down payment requirement. A 750+ credit score gives you the best rates and quickest approval.
5. What happens after a car loan is paid off?
You must collect the NOC from the bank, remove hypothecation from your RC at the RTO, update your car insurance, and check your CIBIL report to ensure the loan is marked as “Closed.”
6. What happens if a car loan is not paid in India?
Penalties, late fees, and credit score damage begin immediately. After repeated missed EMIs, the bank can repossess and auction the vehicle and may even take legal action to recover dues.
7. Is it better to take a car loan or buy a car outright?
If you want to preserve savings, a car loan helps spread the cost over EMIs. If you prefer zero debt and can comfortably pay upfront, buying outright may be better. It depends on your financial situation.
8. How can Money Matter help me choose the best car loan?
Money Matter helps you compare interest rates, EMIs, eligibility, documents, and fees from top banks and lenders in India. We simplify complex terms into easy guidance so you can pick the right car loan confidently and avoid hidden charges or bad loan terms.
Need Expert Guidance
